<PAGE 1>
Exhibit 3
Commonwealth Energy System
Form 8-K
For Event Reported December 30, 1998
Notes to Consolidated Unaudited
Pro Forma Condensed Financial Statements
Balance Sheet
1. The historical consolidated financial statements of Commonwealth
Energy System (the Parent) and its subsidiary companies as of September
30, 1998 have been adjusted to give effect to the transaction between
affiliates of Southern Energy New England, L.L.C., (Southern), a
subsidiary of Southern Company, and the System's subsidiaries Canal
Electric Company (Canal), Cambridge Electric Light Company (Cambridge) and
Commonwealth Electric Company (Commonwealth) that occurred on December 30,
1998. On that date, Canal, Cambridge and Commonwealth sold their non-
nuclear generating assets to Southern. The pro forma financial statement
adjustments are based on the book value of the assets that were sold by
Canal, Cambridge and Commonwealth.
The pro forma balance sheet also reflects the repayment of long and
short-term debt with proceeds from the sale of these generating assets and
proceeds from the planned issuance of long-term debt by Cambridge
($25 million) and Canal ($60 million).
2. A reconciliation of the cash proceeds from the sale of these assets
and the subsequent financing plans reflected in these financial statements
is as follows:
(Dollars in thousands)
Cash balance at September 30, 1998 $ 3,650
Proceeds from sale 461,898
Long-term debt issues 85,000
Tax liability related to sale (148,137)
Transaction costs (23,223)
Retirement of debt -
Short-term (89,568)
Long-term (93,918)
Other items 6,688
Pro forma cash balance at September 30, 1998 $202,390
Income Statement
The net after-tax gain from the sale of Canal Units 1 and 2 is offset
on a consolidated basis by a loss recorded by the Parent for its liability
to customers of Commonwealth and Cambridge pursuant to the system's
divestiture filing approved by the DTE. The net after-tax gain from the
sale of Cambridge's Kendall Station facilities is reflected as a
regulatory liability to Cambridge's customers pursuant to the divestiture
filing.
<PAGE 2>
Exhibit 3
(Continued)
Commonwealth Energy System
The pro forma income statement adjustments for electricity purchased for
resale, transmission and fuel and other operation and maintenance
represent the amounts resulting from the assets sold.
Other operation and maintenance for the twelve months ended December
31, 1997 includes a one-time charge of $17.7 million for costs associated
with a personnel reduction program implemented during the second quarter
of 1997.
Summary of Significant Pro Forma Adjustments
Debit Credit
(Dollars in thousands)
Entry 1:
Cash $461,898
Accumulated provision for depreciation 173,435
Property, plant and equipment $252,509
Stranded investment customer liability 396,435
Deferred tax reserve 156,638
Accrued income taxes 148,136
Provision for deferred taxes 3,298
Miscellaneous expense 8,407
To record the sale of the assets, the regulatory liability that represents
the net proceeds from the sale pursuant to the system's divestiture filing
with the DTE, and the accrual of income taxes associated with the sale.
Entry 2:
ITC Reserve 2,451
Amortization of ITC 2,451
Deferred tax reserve 2,658
Provision for deferred taxes 2,658
To reverse excess taxes and ITC relating to generating assets that were sold.
Entry 3:
Accrued income taxes $148,136
Transaction costs 23,223
Cash $171,359
To record the payment of income taxes and transaction costs associated
with sale.
<PAGE 3>
Exhibit 3
(Continued)
Commonwealth Energy System
Entry 4:
Stranded investment customer liability $31,775
Deferred charges $31,775
To record a reduction in the regulatory liability to customers for
transaction costs and certain revenue.
Entry 5:
Cash $85,000
Long-term debt $85,000
To record the issuance of long-term debt.
Entry 6:
Short-term notes payable $89,568
Long-term debt 93,918
Cash $183,486
To record the retirement of long and short-term debt.
Entry 7:
Accounts Payable $14,085
Accounts Receivable $14,085
To reduce accounts payable and accounts receivable to reflect a more
appropriate level for continuing operations.